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U.S. CHIP MAKERS RECOVERING

This is a digitized version of an article from The Times’s print archive, before the start of online publication in 1996.
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After $2 billion in losses and 25,000 layoffs, the nation's semiconductor industry - which makes the chips that run everything from computers to spy satellites to dishwashers -appears to have made a long-awaited rebound, industry executives and analysts say.

The recovery can be attributed partly to the effects of the Reagan Administration's trade sanctions against Japan and to a surge in personal computer buying. These developments have spurred demand for American-made chips and improved prices that until recently barely exceeded the cost of production.

After two and a half years of overflowing supplies, there are shortages of some types of advanced chips. Moreover, most forecasters now agree that the domestic semiconductor industry will grow between 15 percent and 20 percent this year.

But the apparent turnaround has resulted as much in caution as in relief in California's Silicon Valley and other high-technology centers where the semiconductor industry's near collapse triggered doubts about the nation's ability to remain technologically self-sufficient.

Many fear that the rebound could mask the need for fundamental changes in the way United States semiconductor manufacturers must design and produce electronic components to remain competitive. Others in the industry say it could derail new Government-industry initiatives when the nation has been losing its edge over Japan in next-generation microelectronics.

''We're definitely in a recovery and that's great,'' said Andrew S. Grove, president of the Intel Corporation, of Santa Clara, Calif., one of the nation's largest and most politically influential chip makers. ''But an upturn will not fix us. And if we all get a sense of false security, that would be a fatal mistake.''

Added Charles Ferguson, who has studied the industry's woes for the Massachusetts Institute of Technology, ''The problem is that once many of these companies begin to be profitable again, they and the Government may both lose sight of the major changes that must happen immediately.''

Even with the recovery, virtually no one expects the industry to return to the heights it reached three years ago. All but a handful of American manufacturers have abandoned production of basic computer memory chips, called ''dynamic random access memory'' chips, and this market is dominated by the Japanese today. A few manufacturers have ceased to exist altogether, and a few more are rumored to be takeover targets. In the past month, two mergers have been announced, one in the United States and one in Europe, and more are expected.

''There was lasting damage done, the kind of damage that made people think about the long-term viability of the industry,'' said Irwin Federman, chief executive of Monolithic Memories Inc., a Santa Clara, Calif., company that announced recently that it will be acquired by a neighboring concern, Advanced Micro Devices Inc. ''That's probably a good thing.''

There are also still doubts about the length and depth of the current recovery. While orders are strong again, the chip industry is as unpredictably cyclical as the Pac-Man video games it engendered. Any number of events - from major breakthroughs commercializing advances in superconductivity to another slump in computer buying to the sudden emergence of Korea as a competitor - could radically alter the industry's fate.

But already, events in both the commercial and political arenas have had an unexpected impact on the industry, according to many executives and analysts. The Surge in Computer Sales

First among them is a sustained surge in purchases of personal computers, both older and advanced models. As computer makers have raced to meet the demand, they have placed large orders for many types of logic and memory chips. And in some cases, they have been frustrated by shortages.

Intel, for example, had to turn away or delay orders from the International Business Machines Corporation for tens of millions of dollars worth of its new 80386 microprocessor, the key component in I.B.M.'s new Personal System/2 line of computers. The problem was worsened by the discovery of a manufacturing flaw in the Intel processor.

The second surprise has arisen from Japan's reaction to the 100 percent duties imposed by the United States on some computer and other electronic goods in retaliation for the ''dumping'' of chips - selling them below cost to gain market share - in Southeast Asia and the United States. After little initial movement, the dumping appears to have stopped, and as a result prices of the most commonly dumped chips, such as 256-kilobyte dynamic random access memory chips and ''erasable-programmable read-only memories,'' have risen steadily in recent months. Markets Opening Overseas

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''The dumping has stopped, there is no question,'' said Gene Norett, who follows the industry for Dataquest, a California market research firm. As a result, United States manufacturers have found that they can export far more of their own chips, particularly to the fast-growing markets in Southeast Asia that until recently were dominated by Japanese parts.

''This demonstrated to the Japanese that America is not a paper tiger,'' said Jerry Sanders, the chief executive of Advanced Micro Devices, when asked about the effects of the sanctions. ''It demonstrated that the U.S. semiconductor industry is a sacred industry here.'' [ Japan's Trade Minister, Hajime Tamura, yesterday urged the country's largest chip makers and users to increase their imports of semiconductors made in the United States, Reuters reported. He made the request before talks this week in which Japanese officials will try to persuade the United States to lift the sanctions imposed last month. ] A third surprising development, according to experts here and in Japan, is a subtle change in attitude among Japan's electronics giants. Under increasing profit pressure on many fronts, the companies appear to be tiring of the hundreds of millions of dollars in losses generated by their semiconductor divisions during the chip market-share wars with the United States. Some of these companies have therefore quietly welcomed the rise in chip prices. And the Toshiba Corporation, Hitachi Ltd. and the Mitsubishi Electric Corporation said Friday that they now plan slight increases in chip production this year because of increased demand. Dollar's Drop Hurting

Worsening the troubles facing Japan's electronics companies is the increasing value of the yen against the dollar, which has made Japanese components more expensive and therefore somewhat less attractive in export markets. Meanwhile, some of the consumer electronics products that are heavy users of Japanese-made chips, such as video cassette recorders, are selling more slowly today than two years ago.

At the same time, most experts say that Japan's reversals are temporary and should be of little solace to United States competitors. At best, most analysts say, they give the American semiconductor industry a little more time to make fundamental changes.

Getting agreement over what those changes should be has proved far more difficult than many expected. Some experts think American manufacturers should move even further away from the mass production of basic ''commodity'' chips and toward the flexible capacity to design and manufacture new generations of customized chips, which are sold in smaller numbers.

Many in the Government and some in the industry are now questioning whether Sematech, the industry consortium that plans to develop advanced techniques for use by all of the major American chip makers, is properly focused on the industry's problems. The consortium will concentrate on manufacturing techniques, an area in which Japan is widely acknowledged to have gained supremacy.

At the Pentagon, which would like to keep chip-dependent United States weapons systems a generation ahead of those of competing nations, some military specialists say they fear that the effort will not pay sufficient attention to the design of advanced chips.